Does the Relative Income of Peers Cause Financial Distress? Evidence from Lottery Winners and Neighboring Bankruptcies

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FRB of Philadelphia Working Paper No. 18-16

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Sumit Agarwal; Vyacheslav Mikhed; Barry Scholnick
financial distress; social comparisons among peers
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paper description
We examine whether relative income differences among peers can generate financial distress. Using lottery winnings as plausibly exogenous variations in the relative income of peers, we find that the dollar magnitude of a lottery win of one neighbor increases subsequent borrowing and bankruptcies among other neighbors. We also examine which factors may mitigate lenders’ bankruptcy risk in these neighborhoods. We show that bankruptcy filers can obtain secured but not unsecured debt, and lenders provide secured credit to low-risk but not high-risk debtors. In addition, we find evidence consistent with local lenders reducing bankruptcy risk using soft information.